CORPORATE GOVERNANCE IN SOUTH

AFRICA Philip Armstrong

Developments and Capacity Building
South Africa appreciated the need for corporate
governance in the larger context of its political reform
after the collapse of apartheid, the new opportunities
on acceptance by the global economy and the
aspiration for equitable and swift economic
development. This article traces the background, the
King Code, recent developments and the initiatives in
capacity building. The King committee, 1994 (chaired
by Justice Mervyn King) had focussed on the Board
and was hailed as being more inclusive than the
ones in the West. The code was revised with the
King Committee II, which addressed the issues of
listed companies, banks, public enterprises and the
regulators with greater emphasis on the qualitative
aspects of corporate governance that sets it apart
from the rest in the world. The report was initiated by
the industry bodies than the government or
regulators yet it has attained a self-regulatory
status with several companies following it and the
regulators encouraging the industry to adopt the
code. Arising from the Committees emphasis on the
need for director training, there have notable
initiatives to impart training and education in
Corporate Governance, as the article describes.

Full text
 CORPORATE GOVERNANCE IN SOUTH AFRICA
Developments and Capacity Building

by
Philip Armstrong
(printed earlier in IJTD Corporate Governance Special Issue. )

(Philip Armstrong was Managing Director of ENF Corporate Governance in South Africa and also works with
Global Corporate Governance Forum, World Bank, International Finance Corporation, Commonwealth Secretariat,
NEPAD and others.
He was the principal convenor and main editor of the second King Report and also authored the Commonwealth
Guidelines. armstro@iafrica.com.
This article is drawn from a more detailed synopsis of corporate governance in South Africa, by the same author, which
will shortly appear in a publication of the South African Institute of International Affairs. )
Background

Corporate governance in South Africa was not stimulated by any significant crisis in the corporate
sector as in the case of a few other countries, but by concerns of competitiveness following the re-
admission of South Africa to the global economy following its transition to a fully-fledged democracy
with the collapse of apartheid. Corporate governance has been well developed since the establishment
of the King Committee on Corporate Governance (King Committee) in 1992, at the instigation of the
Institute of Directors of Southern Africa (IoD) and the release of the first King Report in November
1994.

The first King Report drew attention to the importance of a properly functioning board of directors as a
key ingredient of good corporate governance. While it advocated many of the standards and principles
common to several Commonwealth countries, following the release of the Cadbury Report in the
United Kingdom in 1992, it was perhaps distinguished by its integrated approach to good governance
in the interests of a wide range of stakeholders with regard to good financial, social, ethical and
environmental practice.

Up until the early 1990s, the South African economy was characterised by a small number of mining
finance houses that dominated the economy. These comprised diverse activities and investments,
operating primarily in South Africa on account of stringent exchange control restrictions and the
political isolation of the economy (though trading internationally through discrete means). The
consequence of this was that the proper functioning of market mechanisms and a sound corporate
culture of transparency and disclosure was largely stifled, accompanied by excessive rent seeking by
government and complacent private sector management. At the same time, the capital and money
markets, though mature and well developed by emerging market standards, were dominated by a
small number of large insurance and pension funds with mutual ownership structures in which the
same private sector institutions were central. Added to this, utilities, infrastructure industries and key
strategic sectors of the economy fell under government controlled State-owned enterprises where the
rationale for State involvement was overtly political and there was no serious thought given to issues of
governance.

By the advent of a truly democratic political dispensation in 1994, South Africas economy was in an
advanced state of decline due to political isolation, inward-looking economic policies and the legacy of
racial exclusion. The economy was also vulnerable to external forces due to insufficient net inflows and
an unattractive investment climate. This motivated a policy of economic liberalisation, with special
emphasis placed on capital market development and corporate reform. Creating sound macro-
economic fundamentals has enabled more targeted micro-economic reforms to generate economic
growth levels sufficiently to address South Africas policy goals, and corporate governance has very
much been a feature in this process.